George Osborne’s economic medicine is working, so why is it being administered
in such tiny amounts?

Never has a Chancellor squeezed the rich as effectively as George Osborne. Others may have snarled at them, or muttered darkly about wealth taxes. But ministers are judged by their actions, and figures can speak for themselves. This year, according to HM Revenue & Customs, the best-paid 1 per cent in Britain will fork out almost 30 per cent of the income tax. It is a statistic that ought to warm the heart of the most ardent class warrior: those with the broadest shoulders are bearing a heavier burden than ever before. And to achieve this, the Chancellor did something very simple: he cut the top rate of tax.

This is no mystery. As John F Kennedy pointed out, it is a paradoxical truth that the surest way to raise revenues in the long run is to cut tax rates now. As he explained, every dollar released from taxation which is spent or invested creates a new job or a new salary. Osborne was brave in axing the 50p rate, and ridiculed when he said he’d end up with more money. But as things turned out, the richest are not just creating more wealth, but paying record amounts of tax. The lower-paid half of British workers will be asked to contribute a tenth of income tax this year – lower than any year under Labour.

The Chancellor did not, quite, make this point on Wednesday, because something rather odd is happening to the British economy. Osborne’s initial mission – to balance the books by the next election – has ended in failure. He now has no deadline and plans instead to cut spending by a total of 0.3 per cent. He has given himself another five years to hit this goal. This is not taking an axe to spending; it is threatening it with a pair of nail scissors. If you were to list the fiscal consolidations carried out by developed economies over the past four decades, Mr Osborne’s would not make the top 20.

He has been timid, and has been punished for it. But where he has been bold, vindication has been swift. Take his decision, three years ago, to axe half a million public sector jobs. He was unusually frank about this, and added that the economy would create even more jobs to compensate. Ed Balls described this as a “complete fantasy”. Yet things have developed precisely as predicted: for every job shed from the public sector, three have been created in the private. This is as you’d expect: government cannot “create” jobs. The best it can do is use taxation to move them, from the private economy to the public sector. Mr Osborne has simply been shifting them back.

Nor have his cuts (where applied) paralysed public services. Savings in the education budget have coincided with an educational renaissance in England, with scores of new schools opening. Michael Gove’s reforms have ensured that money is used better, and teachers trusted more. Nor have cuts to the UK Border Agency led to the chaos Labour predicted – net immigration has fallen, and rules have effectively been tightened. The police budget has fallen, and so has crime. This ought not to be puzzling. If public services were not transformed when stuffed full of cash in the boom years, there is no reason why they should implode now.

Even Eric Pickles was expecting to be burnt in effigy when he cut councils’ budgets by a quarter. It is easy for them to retaliate: they could close libraries, and sack lollipop ladies, switch off street lights and blame the Coalition when people complained. Mr Pickles, a former Yorkshire council leader, actually has experience of running things and was expecting a battle royal. It never arrived. Polls show that public confidence in councils has risen. The efficiencies he has found in his department (clearing two entire floors) have put less ambitious ministers to shame.

The arts budget has been hardest-hit of them all: its funding is being been cut by a third. Sir Nicholas Serota, head of the Tate, declared this “a blitzkrieg” and “the greatest crisis in arts and heritage since government funding began”. Today, culture in Britain is flourishing more than ever. Again, this is no mystery: the creative life of this country has never depended on a Whitehall bureaucracy. Sir Nicholas’s howls of protest sound ridiculous when set against the ingenious ways in which our galleries, theatres and museums have attracted both crowds and sponsors. Society has stepped in where the state stepped back.

Even the tiny tax break Mr Osborne gave to low-paid workers (in the form of a higher tax threshold) is having an effect. For rich and poor, the same rules apply: the lower the tax, the greater your incentive to work. Britain is midway through a 10-year slump, yet we are turning into a nation of workers once more. The official workforce “participation rate” – ie, those either in work or looking for it – stands at a 20-year high. Never have we had more people in work.

The problem is that the Chancellor’s medicine has been administered in minuscule amounts. And the good that has been done has been eclipsed by the cost of his prevarication. His glacial pace of deficit reduction has run up a huge bill (the longer he takes, the higher the interest on the national debt – it will have risen by £8,000 in the time you have taken to read this sentence). He seems nervous of radicalism, and has already left it too late to make meaningful economic progress before the next election. Given the disarray of the Labour Party, it is unclear what – or who – he is afraid of.

Mr Osborne’s allies insist that his tantric approach to austerity is some kind of political masterplan. But it is hard to blame public opinion when the consensus seems to support further and faster reform – among young voters especially. The polling firm Mori has been publishing a fascinating glimpse into the opinions of “Generation Y”, the under-31s, who are certainly radicals – but more likely to have Thatcher on the wall than Che Guevara. They are the least likely to agree that “the welfare state is one of Britain’s proudest achievements” and the only age group who have warmed to the Tories since the election.

The terms of debate are shifting, and Mr Osborne seems not to realise the extent of his advantage. The Chancellor sometimes flatters himself that he has won the argument, but the polls supported cuts way before he accepted the fact. None the less, Labour is having to abandon its claim that the cuts have been too deep and harsh – and it does not have an alternative. Mr Osborne, on the other hand, has plenty of alternatives, mainly extensions to what he has started. For example, lowering the top rate of income tax to 40p, from 45p, would probably bring in far more money. He should end his ringfencing and ask all departments, even the NHS, to find savings. And an emergency tax cut for those on modest incomes, funded by a lower benefits cap, would be as popular as it would be effective; where applied abroad, tax reductions for the low-paid have helped employment and have even paid for themselves.

But for reasons that owe more to psychology than psephology, these measures are unlikely to materialise. Mr Osborne appears to consider himself a prisoner of public opinion, living in fear of caustic poll results. It sometimes looks as if he is afraid of his own success. He is winning this debate, but that will make little difference if he acts as if he’s losing it.